INSIGHT

Disputes as to the validity of an agreement - a matter for arbitration or the courts?

By Nick Rudge , Andrea Martignoni, Peter O'Donahoo
Infrastructure Property & Development Dispute Resolution

In brief 5 min read

A recent decision of the High Court confirms the scope of arbitration clauses that refer disputes 'under' a deed or agreement can be broad enough to capture disputes about the validity of the agreement. 

Key takeaways

  • The High Court has confirmed that an arbitration clause must be construed by reference to the language used by the parties, the surrounding circumstances and the purposes and objects of the contract. It also suggests courts will construe arbitration clauses widely and will not interpret them to limit their operation unless there are clear words to that effect.
  • In disputes where the rights of a party entitled to the benefit of an arbitration clause are an essential element of the third party's defence, the third party may be entitled to the benefit of the arbitration clause.
  • Nevertheless, the controversy between the approaches in Rinehart v Welker and Fiona Trust in relation to the interpretation of 'under this deed' remains unresolved. Arbitration clauses should be drafted with care, adopting broad language if it is intended that all disputes (including disputes as to the validity of the contract itself) are to be referred to arbitration.

Background

On 8 May 2019, the High Court handed down its decision in the matter of Rinehart v Hancock Prospecting Pty Ltd; Rinehart v Rinehart [2019] HCA 13, relating to the long-running dispute between Gina Rinehart and two of her four children: Bianca Rinehart and John Hancock (the Applicants).

Gina Rinehart entered into a number of settlement deeds with the Applicants between September 2003 and November 2010 in relation to certain claims and threats of litigation made publicly by John Hancock. The settlement deeds contained dispute resolution clauses providing that any dispute 'under this deed' and 'any dispute hereunder' be referred to arbitration.

The Applicants claimed the settlement deeds were not valid because they executed the deeds under the undue influence of their mother and wanted the matter to be dealt with by the courts.

Gina Rinehart applied to the Federal Court of Australia to have the dispute referred to arbitration pursuant to section 8(1) of the Commercial Arbitration Act 2010 (NSW) (the NSW Act).

Scope of the arbitration clauses – decisions at first instance and on appeal

At first instance, the primary judge held that disputes as to the validity of a deed are not disputes 'under the deed' because disputes 'under' a deed depend on the existence of the deed itself. Her Honour relied on the construction of 'under this deed' by the Court of Appeal of the Supreme Court of New South Wales in Rinehart v Welker as authority that 'under this deed' is to be given a narrower construction than phrases such as 'arising out of' or 'in connection with'.

The Full Court of the Federal Court of Australia disagreed with the primary judge and stayed the court proceedings, allowing the arbitrator to deal with the dispute as to the validity of the deeds. The Full Court held that that 'under this deed' should be given a liberal (as opposed to narrow) interpretation, unless the context requires otherwise. A significant part of the Full Court's reasonings considered the decision of the House of Lords in Fiona Trust & Holding Corporation v Privalov.

Scope of the arbitration clauses – the decision of the High Court

The High Court unanimously dismissed the appeal and agreed with the conclusion reached by the Full Court that the dispute as to the validity of the deeds fell within the scope of the arbitration clauses.

The High Court found it unnecessary to consider the correctness of the approach in each of Rinehart v Welker and Fiona Trust to resolve the appeal, instead determining the appeal based on orthodox principles of contractual interpretation. Whilst there may be cases which have to be resolved largely, if not entirely, by reference to the language of the relevant arbitration clause, in this case the context in which the deeds were entered into clearly indicated the scope of the arbitration clauses should include disputes as to the validity of the deeds.

The deeds were intended to address risks of commercial damage to the Hancock Group by public statements of the applicants and the risk of disclosure of confidential information. In this context, it was important that all disputes relating to the deeds - including as to their validity, which in this case were intertwined with the substantive questions in the proceedings - be non-public and confidential.

The cross-appeal – claiming 'through or under' a party

The High Court also considered the cross appeal by three of the respondents (Third Parties) that claims brought against them by the Applicants (concerning tenements transferred to them by Hancock Prospecting Pty Ltd (HPPL) and Hancock Resources Limited (HRL)) should be stayed pursuant to section 8 of the NSW Act on the basis that each of them was claiming 'through or under' HPPL and HRL, who are parties to the Hope Downs Deed.

The majority (Edelman J dissenting) allowed the cross-appeal and ordered the proceedings be stayed under section 8(1) of the NSW Act.

This decision was based on the fact that the Third Parties' defence to the Applicants' claims against them was reliant on the question of whether HPPL and HRL committed a breach of trust, or were otherwise absolved of responsibility for breach of trust by reason of broad releases in the Hope Downs Deed, such that the Third Parties stand in the same position as HPPL and HRL. Accordingly, the Third Parties were bringing their claim 'through or under' HPPL and HRL and were therefore entitled to receive the benefit of the arbitration clause in the Hope Downs Deed.

The majority considered it was not appropriate to contemplate the broader issues of arbitral consent and privity. However, Edelman J (dissenting) addressed the issue squarely, noting that the definition of 'party' in the NSW Act is not an exception to the ordinary rules of privity of contract, and making an analogy with the position of a third party guarantor who seeks to avoid liability under a guarantee by proving there was no liability under a principal contract of loan, where the principal contract contains an arbitration clause but the guarantee does not. In that situation, the guarantor is not party to the principal contract and consequently is not bound by, nor entitled to the benefit of, the arbitration clause.

The decision of the majority prevails as the current law. In disputes where the rights of a party entitled to the benefit of an arbitration clause are an essential element of the third party's defence, the third party may be entitled to the benefit of the arbitration clause.